Real Estate Appraisal - Chapter 4: Value and Economic Principles

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What are the four elements that create value?

a. Transferability, utility, scarcity, and discount

b. Demand, utilility, substitution, and transferability

c. Demand, uniformity, scarcity, and transferability

d. Transferability, demand, scarcity, and utility

(d) the four elements that create value are "DUST": demand, utility, scarcity, and transferability. Page 87

What is the difference between demand and effective demand?

a. Demand is the desire or ability to purchase a commodity; effective demand is the desire and ability

b. Demand is the desire and ability to purchase a commodity; effective demand is the desire or ability.

c. There can be no demand without effective demand.

d. There is no difference

(a) Demand is the desire OR the ability to purchase a commodity. Effective demand implies possession of both. Page 87

A lot that previously supported a gas station is contaminated because of its prior use. Which of the four elements that create value does this property most likely lack?

a. Demand

b. Utility

c. Scarcity

d. Transferability

(b) While this particular property may be missing other elements that create value, from the information provided, its utility is negatively impacted by the contamination. Page 88

A major corporation purchases several waterfront commercial lots with the plan of demolishing the current structures and erecting a large retail complex. This is known as:

a. an arm's length transaction

b. anticipation

c. assemblage

d. conformity

(c) assemblage is the act of putting several smaller, less valuable parcels together under one ownership interest so that the value of the combined parcels may increase. Page 94

A lakefront property in Seattle, Washington is currently on the market for $850,000. It has 2,500 square feet and the lot is 50 feet deep. What is the cost per front foot?

a. $1,700

b. $17,000

c. $340

d. $3,400

(b) A lot that contains 2,500 square feet and is 50 feet deep has a width of 50 feet. (2,500 square feet / 50 feet = 50 feet). Front foot is the width of a property along a street or other boundary, and is most widely used as a measurement for properties located on beaches and lake shores. $850,000 / 50 feet = $17,000. Page 91

Which exposure orientation would a street front retailer prefer?

a. South and east

b. North and east

c. North and west

d. South and west

(d) the south and west sides of business streets are usually preferred by shopkeepers because customers will seek the shady side of the street and window displays will not be damaged by the sun. Page 91

Corey purchases a home in Phoenix, Arizona in the first phase of development. By the time the home is prepared for occupation, Corey's property value has risen by 35%. This is an example of:

a. progression

b. regression

c. unearned increment

d. opportunity cost

(c) an unearned increment is a term used in real estate appraisal to indicate that an increase in value was not the result of anything the owner did. Factors like inflation, in the economy or just in the regional or local real estate market, can cause an increase in value. Page 96

Abigail is a real estate agent who has been trying to sell the old McPherson place on Brewster Lane for several years. Even though it is on the market under value, the property will not sell because the local townspeople are convinced it is haunted. What term describes this property?

a. Stigma

b. Utility

c. Effective demand

d. Scarcity

(a) a stigma is a lingering effect in the minds of people regarding the desirability or usefulness of a property, whether real or imagined. Page 101

Joan sold her house to her son for $250,000. Similar properties in the area are selling for $325,000. $250,000 is representative of this property's:

a. value

b. price

c. cost

d. going concern value

(b) Price is the amount a purchaser agrees to pay and a seller agrees to accept the circumstances surrounding their transaction. Page 86

In real estate, the term "worth" is synonymous with which of the following terms?

a. Value

b. Price

c. Cost

d. All of the above

(a) when appraisers indicate the value of property, they are usually indicating an estimate of its monetary worth. Page 86

If a 3 bedroom/2 bath house cost $200,000 to build last year and recently sold for $250,000, what is its value?

a. $200,000

b. $250,000

c. $300,000

d. Depends on what the property would bring in the current fair and open market

(d) by definition, value is the price an object or service would bring in a fair, open market. Page 86 & 102

Which of the following is an example of an arm's-length transaction?

a. Parent sells family home to child for $25.00

b. Wealthy eccentric must have neighboring lot and overpays

c. Seller does not notify buyer of known proeprty stigma

d. None of the above

(d) An arm's length transaction refers to a transaction where all parties involved are knowledgeable, acting in their own self-interest, and are under no undue influence or pressure from other parties. Page 103

In a typical appraisal assignment, which type of value is of greatest importance to an appraiser?

a. value in exchange

b. appraisal value

c. value in use

d. subjective value

(a) The overwhelming majority of appraisals performed are concerned with estimating the market value of a property, which is the same as its value in exchange. Page 101

Which principle of valuation is the underlying principle of all approahces to value?

a. substitution

b. supply and demand

c. competition

d. contribution

(a) The principle of substitution is the foundation for all of the appraisal process. Page 109

Which one of the following statements is most correct:

a. When supply is high and demand is high, then value tends to be high

b. when supply is low and demand is high, then value tends to be high

c. when supply and demand are in equilibrium, then value tends to be high

d. when supply is high and demand low, then value tends to be high

(b) increasing supply or decreasing demand will reduce the price in the market. Reducing supply or increasing demand will raise the price in the market. Page 109

Josh is present with Investment A and Investment B, both very attractive. Josh can only afford to invest in one and chooses Investment B. One year later, he learns that Investment A yielded 80% more profit than the investment he chose. Which principle is applied in this situation?

a. Substitution

b. Opportunity cost

c. Unearned increment

d. Regression

(b) opportunity cost is the highest valued alternative investment that was NOT chosen. Page 110

Leonard purchased adjacent lots in a suburban area where the typical house is a 3 bedroom/2 bath under 2000 square feet. Leonard intends to combine the lots and build a 7 bedroom/6 bath Spanish style mansion. Which principle of valuation is Leonard disregarding?

a. Principle of progression

b. Principle of regression

c. Principle of conformity

d. All of the above

(c) progression and regression only affects properties of the same type. Leonard's mansion is clearly defiant of the principle of conformity, which holds that when land uses are compatible and homes are similar in design and size, the maximum value is realized.

Chet bought a cabin in the mountains for $45,000. He repaired the furnace, redecorated the interior, and repainted the exterior. All of this work totaled over $7,000. When he tried to resell it, the best offer he ot for his cabin was $48500. Which principle of valuation does this scenario exemplify?

a. Opportunity cost

b. Competition

c. Regression

d. Contribution

(d) the principle of contribution is the concept that the worth of a particular component is calculated in terms of its contribution to the value of the whole property, or as the amount that its absence would detract from the value of the whole. Page 113

Which of the following is one of the four agents of production?

a. Mangement

b. Demand

c. Supply

d. Value

(a) the four agents of production (land, labor, capital, and management) may be increased in varying amounts to increase the value and/or income attributable to a property. Page 114

What are the four stages of the neighborhood lifecycle?

a. Growth, stability, demand, and revitalization

b. Regression, growth, stability, and decline

c. Decline, revitalization, growth, and stability

d. Scarcity, decline, revitalization, and growth

(c) property goes through four distinct changes called a neighborhood life cycle: Growth, Stability, Decline, and Revitalization